ECB Moral Suasion May Affect Lingering Euro

EUR/USD Price Analysis

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EUR/USD UPWARD MOMENTUM SLOWS

EUR/USD price action continues to push up but has since slowed relative to prior impetus. US Non-Farm Payroll (NFP) data has clawed back some US Dollar strength on Friday which has sustained a series of small bodied candles since Thursday last week. These daily candles imply indecision between bulls and bears who could be waiting on further data to provide a directional bias. The week ahead is riddled with Euro heavy economic events which could be the catalyst for a change in sentiment.

EUR/USD TECHNICAL ANALYSIS

The monthly chart below shows EUR/USD remaining within the multi-year symmetrical triangle at topside resistance (yellow). As price approaches the apex of the triangle pattern, market participants will be looking for a substantial break up or down. Options traders may look to employ straddle or strangle strategies around the apex price which looks to exploit price fluctuations in either direction.

EUR/USD Monthly Chart:

Chart prepared by Warren Venketas, IG

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EUR/USD Daily Chart:

EUR/USD Latest: ECB Moral Suasion May Affect Lingering Euro

Chart prepared by Warren Venketas, IG

EUR/USD price action exhibits a strong upward trajectory which is opposed by the Relative Strength Index (RSI) as the oscillator shows a decline in momentum (black). This is known as divergence between price and the RSI – more specifically bearish divergence which is suggestive of a possible price reversal to the downside. Divergence can appear for prolonged periods so assuming an immediate reversal is not wise.

The key 1.2000 psychological level (blue) has been briefly breached for the first time on Tuesday last week since May 2018. A confirmed break above the 1.2000 level which coincides with trendline resistance (yellow) may signal further upside.

Depending on upcoming economic events, price may bounce of channel support (highlighted blue area) and continue the short-term upward trend while a break below channel support may see bears eye the August low at 1.1695.

ECONOMIC CALENDAR: EUR/USD WEEK AHEAD

DailyFX Economic Calendar

EUR/USD Latest: ECB Moral Suasion May Affect Lingering Euro

Upcoming GDP figures scheduled for tomorrow (9:00GMT) and the European Central Bank (ECB) monetary policy meeting on Thursday (11:45GMT) will likely be the most significant events of the week. While depressed GDP figures are expected, there is much to look forward to from the ECB meeting.

Three main areas to look out for:

1. Strong Euro

A soaring Euro has captured the eye of ECB chief Christine Lagarde who has revealed the ECB is aware of the ascent and will monitor the pair cautiously. Although the ECB is unlikely to intervene based on past actions, there may be some form of verbal communication that may affect Euro crosses.

2. Low inflation

Low inflation figures may point to a sustained dovish outlook by the ECB. After the Federal Reserve Bank (FED) announced inflation targeting of 2% on average, the ECB will likely follow suite.

3. Pandemic Emergency Purchase Programme (PEPP)

The PEPP scheme (1.35 trillion – of which only a portion has been used) adopted by the ECB as a shield to the global COVID-19 pandemic may increase its usage in an attempt to curb inflation woes. An increase in bond-buying could aid in increasing inflation with the additional stimulus.

There will likely be an increase in volatility around the meeting so it is important to ensure sound risk management to combat potential price fluctuations.

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COT REPORT SHOWS DECLINE IN EURO LONGS

EUR/USD Latest: ECB Moral Suasion May Affect Lingering Euro

Source: Refinitiv

The recent COT data release for EUR/USD show potential vulnerability to speculative longs (see chart above). ECB jawboning may prompt a reversal in EUR/USD which could result in significant price variation.

The Predictive Power of the COT Report

How to Read the CFTC Report

IG CLIENT SENTIMENT DATA POINTS TO SHORT-TERM UPSIDE FOR EUR/USD BULLS

IGCS shows retail traders are currently distinctly short on EUR/USD, with 59% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment, and the fact traders are net-short is suggestive of further upward momentum.



of clients are net long.



of clients are net short.

Change in Longs Shorts OI
Daily 11% 12% 11%
Weekly 22% -10% 1%

EUR/USD STRATEGY MOVING FORWARD

Key points to consider:

  • Daily chart: 1.2000 resistanceand channel support
  • GDP data tomorrow and ECB monetary policy meeting on Thursday
  • Market sentiment – IGCS and COT data

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas

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